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Chapter 10 Example - when it doesn’t meet the minimum but...

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To judge Investment Centers we have 2 methods: o ROI (return on investment) = Profit Margin X Asset Turnover   Profit Margin = Net Income/ Sales Asset T/O = Sales/Average Operating Assets Operating assets are assets that are  used in the daily core  business  of the company such as cash, PPE etc. The company will have a minimum ROI that they look for from  investments and if ROI is below, performance is not good or a  project will be rejected while an ROI above will be accepted.  The  flaw with this, I THINK, is that what might appear bad for one  manager’s division might be turned down when in fact it is good  for the company overall or a good project could be passed over 
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Unformatted text preview: when it doesn’t meet the minimum but 5% is better than no %! EXAMPLE: Macon has sales of $5,000,000 and expenses of $1,500,000. His beginning operating assets were $10,000,000 and his ending operating assets were $14,000,000. He requires 25% on all investments. How would you judge his performance based on ROI? o Residual Income (income that we “make” above and beyond the minimum required return) = Net Income – (Average Assets X RRR) General Rule says that if RI is zero or positive you should accept because you are making your minimum required rate and then some! EXAMPLE: same information as example above. Chapter 10 Examples...
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